Global Insight Perspective | |
Significance | Toyota is planning to build 10 new car production plants by 2010 that will help raise the company's annual output to over 10 million vehicles, according to a Japanese press report. |
Implications | Toyota is set to overtake General Motors next year as the world's biggest carmaker by volume, and these expansion plans will make this position unassailable. |
Outlook | Toyota's aggressive global production expansion plans confirm the company's financial power. If the expansion plans come to fruition, the 10 extra plants will take the company's global production network to 41 factories and will confirm its position as the world's number-one automaker. |
Toyota's Ramps Up its Bid for World Domination
Toyota is close to announcing ambitious global expansion plans that will see the company commit to building 10 new vehicle production plants by 2010, which should in turn see the carmaker's annual output increase to over 10 million units. According to a report in the Yomiuri Shimbun, Toyota is looking to build new factories in the United States and Guangzhou in China by 2009, as well as in France and India by 2010, in addition to six other new plants that have already been announced for Canada, Russia, Thailand, Texas (United States) and Tianjon and Guangzhou (China). President Katsuaki Watanabe said at the end of last year that Toyota planned to boost output by 10% to 9.06 million units in 2006. This is happening at the same time that the world's current number-one carmaker, General Motors (GM), is closing down production facilities and laying off workers in an attempt to return to profitability.
Toyota Goes for the Jugular as Rivals Struggle
While Toyota's closest rivals, GM and Ford, currently flounder as a result of falling domestic sales and crippling legacy costs, Toyota is using its immense cash reserves to drive home its advantage. At the beginning of May, Toyota set a new profit record for the 2005/06 financial year of ¥1.37 trillion (US$ 12.2 billion). The company is using its healthy cash position to invest heavily in boosting its global production capacity and moving its production capability closer to key markets such as North America. Toyota Vice-Chairman Fujio Cho also said that it will likely build the next-generation Prius model at one of its U.S. facilities to meet consumer demand for the car. Toyota's U.S. sales in the current year to date are up 6.4% to 763,810 units at the group level, giving it a 14.2% share of the total market, with the Japanese giant also overtaking DaimlerChrysler (DCX) to become the third best-selling group in April for the first time. Toyota currently has five operational plants in North America and two under construction. An eighth plant would underpin Toyota's overall target of selling three million units in the United States by 2010. Cho has said that he wants to see Toyota produce about 70-75% of those vehicles in North America, up from about 60% now.
Outlook and Implications
Toyota may not yet be the world's number-one manufacturer by production volume, but it is only a matter of time before this is the case. In terms of sale volumes, it appears likely that Toyota will overtake GM in 2007. Sales for the automaker will be boosted this year by the launch of key new models, including the redesigned Camry and Corolla and new Tundra and RAV-4. Toyota will further continue to ramp up production in key markets such as China and the United States in order to fully capitalise on rising demand. Toyota's strategy of expanding its North American manufacturing footprint has made the Japanese giant an important national employer in the United States and therefore far less likely to incur any possibility of a trade war or possible sanctions as the domestic industry struggles. Toyota is continuing to emphasise its key philosophy of constant improvement to ensure that its productivity and efficiency are unparalleled in the global automotive industry, while at the same time continuing aggressive expansion.
However, there are still potential weaknesses in the company's global strategy. Toyota has increasingly invested in hybrid technology and is mulling producing the Prius model in the United States. However, demand for the Prius has fallen from last year's record total of 107,897, with sales for January-April 2006 down 11% year-on-year (y/y) to 30,357 units. Toyota claims that the fall is due to the lack of manufacturing capacity for the car in Japan as the company is increasing production of other hybrid cars; however, the reality may also be that the financial implications of hybrid ownership are sinking in. Consumer reports produced recently on hybrid vehicles questioned their 'real world' logic. It may be argued that Toyota is placing too much emphasis on hybrid technology and that it would be better served developing a budget car for developing markets similar to the Renault Logan. The lack of this kind of model has hurt its growth in developing markets such as India.